The ultra-rich with "foundations, with family offices, with accountants and lawyers involved, are highly unlikely to do all this stuff remotely, but people with much less complicated lives aren’t going to feel that way," he said in a June conference.
Banks can reap more revenue from ultra-wealthy clients prepared to pay for personalized services, while also being able to sell them a wider array of products, said Devin Ryan, an analyst with JMP Securities. In addition to standard mortgages and margin loans, wealth managers can branch into more illiquid assets. The market for loans backed by art is growing and private banks have begun offering to lend a larger portion of the artwork’s value, according to a report by Deloitte Luxembourg and ArtTactic.
"High-net-worth accounts tend to have a higher percentage of the income and the assets, there’s typically more financial products and more financial advice in those relationships," Ryan said.
Brent Beardsley, who leads Boston Consulting Group’s work in asset and wealth management, said that lending on illiquid assets binds the client to an organization.
"A loan is sticky -- high-net-worth clients can’t necessarily just leave and take the loan with them, especially if it’s a hard-to-value loan," Beardsley said.
The business is relatively safe. The Federal Reserve’s stress test earlier this year estimated the loss rate for Morgan Stanley’s book of mortgage loans at about 2 percent, below the average for the 35 banks in the exam. Goldman’s Chavez said this week that 98 percent of the loan book in the firm’s GS Select business is secured.
However, should loans go sour, they can leave an adviser in the awkward position of having to collect on a debt. For example, Goldman had to seize a customer’s yacht last year after he failed to pay.
“‘Lending always has risks because depending on whether the loan is collateralized or not, you have the risk of not being paid back," said JMP’s Ryan. "But having an existing relationship with the customer and information around their financial life allows the firms to make better underwriting decisions."
This article was provided by Bloomberg News.